nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2014‒07‒13
27 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Welfare Cost of Fluctuations: when Labor Market Search Interacts with Financial Frictions. By Eleni Iliopulos; François Langot; Thepthida Sopraseuth
  2. Hysteresis in Unemployment and Jobless Recoveries By Dmitry Plotnikov
  3. On existence and bubbles of Ramsey equilibrium with borrowing constraints. By Robert Becker; Stefano Bosi; Cuong Le Van; Thomas Seegmuller
  4. Optimal taxation and debt with uninsurable risks to human capital accumulation By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  5. Debt Sustainability, Public Investment, and Natural Resources in Developing Countries: the DIGNAR Model By Giovanni Melina; Shu-Chun S. Yang; Luis-Felipe Zanna
  6. The Dynamic Fiscal Effects of Demographic Shift: The Case of Australia By George Kudrna; Chung Tran; Alan Wooland
  7. Existence of equilibrium on OLG economies with durable goods. By Lalaina Rakotonindrainy
  8. Social Security, Unemployment Risk and Efficient Bargaining between Unions and Firms By Pietro Reichlin
  9. Modelo de ciclo de negocios real con dinero endógeno y pasivo By Guberman, Carlos; Cymbler, David
  10. Aggregate Stability and Balanced-Budget Rules By Matteo Ghilardi; Raffaele Rossi
  11. The Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation By Olmos, Lorena; Sanso Frago, Marcos
  12. Learning, Monetary Policy and Asset Prices. By Marco Airaudo; Salvatore Nisticò; Luis-Felipe Zanna
  13. The Macroeconomic Consequences of Asset Bubbles and Crashes By Lisi Shi; Richard M. H. Suen
  14. Efficient Labor and Capital Income Taxation over the Life Cycle By Findeisen, Sebastian; Sachs, Dominik
  15. Financial Crises in DSGE Models: A Prototype Model By Jaromir Benes; Michael Kumhof; Douglas Laxton
  16. Financial Crises in DSGE Models: Selected Applications of MAPMOD By Jaromir Benes; Michael Kumhof; Douglas Laxton
  17. Firm Dynamics and Residual Inequality in Open Economies By Gabriel Felbermayr; Giammario Impullitti; Julien Prat
  18. Monetary and Macroprudential Policies to Manage Capital Flows By Juan Pablo Medina Guzman; Jorge Roldos
  19. On the use of Monetary and Macroprudential Policies for Small Open Economies By F. Gulcin Ozkan; D. Filiz Unsal
  20. Eductive Stability in Real Business Cycle Models By George W. Evans; Roger Guesnerie; Bruce McGough
  21. Austerity, fiscal volatility, and economic growth By Curatola, Giuliano; Donadelli, Michael; Gioffré, Alessandro; Grüning, Patrick
  22. Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies By Juan Pablo Medina Guzman; Claudio Soto
  23. Induced Uncertainty, Market Price of Risk, and the Dynamics of Consumption and Wealth By Luo, Yulei; Young, Eric
  24. Search and Retirement under Asymmetric Information By Bi, Sheng; Langot, François
  25. An Application of Kleene's Fixed Point Theorem to Dynamic Programming: A Note By Takashi Kamihigashi; Kevin Reffett; Masayuki Yao
  26. Estimating the expected duration of the zero lower bound in DSGE models with forward guidance By Mariano Kulish; James Morley; Tim Robinson
  27. Individual and Aggregate Labor Supply in a Heterogeneous Agent Economy with Intensive and Extensive Margins By Yongsung Chang; Sun-Bin Kim; Kyooho Kwon; Richard Rogerson

  1. By: Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economics and CEPREMAP); François Langot (GAINS-TEPP & IRA - University of Le Mans, Paris School of Economics, Banque de France and IZA); Thepthida Sopraseuth (THEMA - University of Cergy-Pontoise and CEPREMAP)
    Abstract: We provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions. The matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it. We show that the magnitude of this non-linearity is magnified frictions. This asymmetric effect of the business cycle leads to sizable welfare costs. The model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter-cyclical opportunity costs of opening a vacancy and wage sluggishness.
    Keywords: Welfare, business cycle, financial friction, labor market search.
    JEL: E32 J64 G21
    Date: 2014–06
  2. By: Dmitry Plotnikov
    Abstract: This paper develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.
    Keywords: Unemployment;Economic recession;Economic recovery;Employment;Business cycles;Economic models;Unemployment, hysteresis, business cycles, sunspots
    Date: 2014–05–06
  3. By: Robert Becker (Indiana University - Department of Economics); Stefano Bosi (EPEE - University of Evry); Cuong Le Van (Centre d'Economie de la Sorbonne - Paris School of Economics, IPAG and VCREME); Thomas Seegmuller (CNRS-GREQAM, EHESS - Aix-Marseille University)
    Abstract: We study the existence of equilibrium and rational bubbles in a Ramsey model with heterogeneous agents, borrowing constraints and endogenous labor. Applying a Kakutani's fixed-point theorem, we prove the existence of equilibrium in a time-truncated bounded economy. A common argument shows this solution to be an equilibrium for any unbounded economy with the same fundamentals. Taking the limit of a sequence of truncated economies, we eventually obtain the existence of equilibrium in the Ramsey model. In the second part of the paper, we address the issue of rational bubbles and we prove that they never occur in a productive economy à la Ramsey.
    Keywords: Existence of equilibrium, bubbles, Ramsey model, heterogeneous agents, borrowing constraint, endogenous labor.
    JEL: C62 D31 D91 G10
    Date: 2014–03
  4. By: Piero Gottardi (European University); Atsushi Kajii (Kyoto University); Tomoyuki Nakajima (Kyoto University and CIGS)
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation, and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
    Keywords: incomplete markets; Ramsey equilibrium; optimal taxation; optimal public debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2014–06
  5. By: Giovanni Melina; Shu-Chun S. Yang; Luis-Felipe Zanna
    Abstract: This paper presents the DIGNAR (Debt, Investment, Growth, and Natural Resources) model, which can be used to analyze the debt sustainability and macroeconomic effects of public investment plans in resource-abundant developing countries. DIGNAR is a dynamic, stochastic model of a small open economy. It has two types of households, including poor households with no access to financial markets, and features traded and nontraded sectors as well as a natural resource sector. Public capital enters production technologies, while public investment is subject to inefficiencies and absorptive capacity constraints. The government has access to different types of debt (concessional, domestic and external commercial) and a resource fund, which can be used to finance public investment plans. The resource fund can also serve as a buffer to absorb fiscal balances for given projections of resource revenues and public investment plans. When the fund is drawn down to its minimal value, a combination of external and domestic borrowing can be used to cover the fiscal gap in the short to medium run. Fiscal adjustments through tax rates and government non-capital expenditures—which may be constrained by ceilings and floors, respectively—are then triggered to maintain debt sustainability. The paper illustrates how the model can be particularly useful to assess debt sustainability in countries that borrow against future resource revenues to scale up public investment.
    Keywords: Public investment;Natural resources;Developing countries;Debt sustainability;Economic models;Natural resources; Public Investment; Debt Sustainability; Small Open DSGE Models; DIGNAR; Developing Countries
    Date: 2014–03–31
  6. By: George Kudrna; Chung Tran; Alan Wooland
    Abstract: In this paper we develop a small open economy, overlapping generations (OLG) model that incorporates non-stationary demographic transition paths to study the dynamic fiscal effects of demographic shift in Australia. Our main results are summarised as follows. First, the demographic shifts towards population ageing lead to a change in the tax base from labor income to capital/asset income and consumption. The effect on income tax revenue is non-linear along the transition paths. Second, the changes in demographic structure cause substantial increases in old-age related spending programs including health, aged care and pensions. Significant adjustments in other government expenditures and taxes will be required to finance the larger old-age related benefits in the future. In particular, the government will have to either cut other expenditures by around 32 percent or increase consumption taxes by 28 percent by 2050 to finance these benefits. Third, the increase in survival rates, rather than the decline in fertility rates, is the main driving factor behind these fiscal costs. Fourth, increases in fertility and immigration are not an effective solution to such budget challenges.
    Keywords: Demographic Transition, Ageing, Overlapping Generations, Dynamic General Equilibrium, Fiscal Policy
    JEL: H2 J1 C68
    Date: 2014–06
  7. By: Lalaina Rakotonindrainy (Centre d'Economie de la Sorbonne)
    Abstract: We consider a standard pure exchange overlapping generations economy. The demographic structure consists of a new cohort of agents at each period with an economic activity extended over two successive periods. Our model incorporates durable goods that may be stored from one period to a successive period through a linear technology. In this model, we intend to study the mechanism of transfer between generations, and we show that the existence of an equilibrium can be established by considering an equivalent economy “without” durable goods, where the agents economic activity is extended over three successive periods.
    Keywords: Overlapping generations model, durable goods, irreducibility, equilibrium, existence.
    JEL: C62 D50 D62
    Date: 2014–05
  8. By: Pietro Reichlin (Department of Economics and Finance, LUISS Guido Carli University)
    Abstract: We construct an overlapping generations model with unemployment risk where wages, employment and severance payments are set through efficient bargaining between risk averse Unions and risk neutral firms. Assuming that a First Best cannot be achieved due to workers' shirking incentives, we characterize a Second Best allocation and show how this can be implemented in a market economy. We prove that the latter generates too little employment and consumption smoothing, an excessive young age consumption and too much saving with respect to the Second Best. This inefficiency can be reduced by increasing the intensity of a pay-as-you-go social security system even if the economy is dynamically efficient.
    Keywords: Social security, labor markets, unemployment.
    JEL: A1 H2 J5
  9. By: Guberman, Carlos; Cymbler, David
    Abstract: We built a real business cycle model with inside money and passive monetary policy that shows some interesting features regarding interest rate dynamics and credit market behavior. We find that the model is stable, a feature that was difficult to find in the literature on passive money. We think this would be a good starting point to analyze monetary policy before and after the international financial crisis that started at the market for secured loans.
    Keywords: Passive money, endogenous money, monetary policy, collateral constraint
    JEL: E10 E42 E43 E44 E52
    Date: 2014–07
  10. By: Matteo Ghilardi; Raffaele Rossi
    Abstract: It has been shown that under perfect competition and a Cobb-Douglas production function, a basic real business cycle model may exhibit indeterminacy and sunspot fluctuations when income tax rates are determined by a balanced-budget rule. This paper introduces in an otherwise standard real business cycle model a more general and data coherent class of production functions, namely a constant elasticity of substitution production function. We show that the degree of substitutability between production factors is a key ingredient to understand the (de)stabilising properties of a balanced-budget rule. Then we calibrate the model consistently with the empirical evidence, i.e. we set the elasticity of substitution between labour and capital below unity. We show that compared to the Cobb-Douglas case, the likelihood of indeterminacy under a balanced-budget rule is greatly reduced in the United States, the European Union and the United Kingdom.
    Keywords: Budgets;United States;United Kingdom;European Union;Business cycles;Capital;Labor markets;Production;Economic models;Constant Elasticity of Substitution; Fiscal Policy; Indeterminacy; Business Cycles.
    Date: 2014–02–10
  11. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: Given the unobservable quality of the natural rate of interest, the consequences of central banks using an incorrect value in the monetary policy rule are analyzed in a New Keynesian DSGE model with endogenous growth, financial frictions and trend inflation. Our results confirm the financial structure plays a key role in the determination of the natural rate of interest and show that the mismeasurements affect the long-run growth rate by modifying the actual inflation rate trend, which is different from the target. Finally, we develop a mechanism to monitor the accuracy of the natural rate estimate.
    Keywords: natural rate of interest, New Keynesian DSGE models, endogenous growth, �financial frictions, trend inflation
    JEL: E43 E44 E58 O40
    Date: 2014
  12. By: Marco Airaudo (School of Economics, LeBow College of Business, Drexel University); Salvatore Nisticò (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome); Luis-Felipe Zanna (Research Department, International Monetary Fund, Washington (DC))
    Abstract: We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that if the financial wealth channel is sufficiently strong responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary, and also mildly passive policy responses to in ation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets.
    Keywords: Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy, Stock Prices
    JEL: E4 E5
    Date: 2014–07
  13. By: Lisi Shi (University of Connecticut); Richard M. H. Suen (University of Connecticut)
    Abstract: This paper examines the macroeconomic effects of asset price bubbles and crashes in an overlapping generations economy. The model highlights the effects of asset price fluctuations on labor supply decisions, and demonstrates how labor market adjustment can help propagate the effects of these fluctuations to the aggregate economy. It is shown that, under certain conditions, asset bubbles can crowd in productive investment and lead to an expansion in total employment, and the bursting of these bubbles can have an immediate negative impact on these variables.
    Keywords: Asset Bubbles, Overlapping Generations, Endogenous Labor
    JEL: E22 E44
    Date: 2014–06
  14. By: Findeisen, Sebastian; Sachs, Dominik
    Abstract: This paper analyzes Pareto optimal taxation of labor and capital income in a lifecycle framework with private information and idiosyncratic risk. We focus on historyindependent tax systems. We thereby complement the Mirrlees taxation literature, which has so far typically either characterized optimal history-dependent distortions or focused on static environments. For labor income taxes, we provide a novel decomposition of tax formulas into a redistribution and an insurance component. The latter is independent of redistributive motives and is determined by the degree of income risk and risk aversion. We show that the optimal linear capital tax rate is non-zero and derive a simple formula, which trades off redistributive and insurance benefits against the efficiency loss from savings distortions. Our quantitative results show that the insurance component contributes significantly to optimal labor tax rates. Optimal capital taxes are significant and yield sizable welfare gains.
    Keywords: Optimal Dynamic Taxation , Capital Taxation , First-Order Approach
    JEL: H21 H23
    Date: 2014
  15. By: Jaromir Benes; Michael Kumhof; Douglas Laxton
    Abstract: This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.
    Keywords: Financial crisis;Credit expansion;Bank credit;Credit risk;Banks;Loans;Macroprudential Policy;Monetary policy;Economic models;lending boom, credit crunch, financial crisis, financialy cycle, asset price bubble, macroprudential policy
    Date: 2014–04–04
  16. By: Jaromir Benes; Michael Kumhof; Douglas Laxton
    Abstract: This paper, together with a technical companion paper, presents MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of both the pre-crisis and crisis phases of financial cycles.
    Keywords: Financial crisis;Credit expansion;Banks;Loans;Credit risk;Macroprudential Policy;Economic models;lending boom, credit crunch, financial crisis, financial cycle, asset price bubble, macroprudential policy
    Date: 2014–04–04
  17. By: Gabriel Felbermayr; Giammario Impullitti; Julien Prat
    Abstract: Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed labor market search into a dynamic model of international trade with heterogeneous ï¬rms and homogeneous workers. Wage inequality across and within ï¬rms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and ï¬rms’ growth process allows us to explain some recent empirical regularities on ï¬rm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping ï¬rm dynamics and aggregate labor market outcomes. Focusing on the period 1996-2007, we ï¬nd that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic deregulation reforms.
    Keywords: Wage Inequality, International Trade, Directed Search, Firm Dynamics, Product and Labor Market Regulation
    Date: 2014
  18. By: Juan Pablo Medina Guzman; Jorge Roldos
    Abstract: We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind†or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.
    Keywords: Monetary policy;Macroprudential Policy;Capital flows;Business cycles;Financial sector;Economic models;Capital Inflows, Monetary Policy, Macroprudential Policy, Welfare Analysis.
    Date: 2014–02–12
  19. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.
    Keywords: Macroprudential Policy;Monetary policy;Small open economies;Emerging markets;Entrepreneurship;External borrowing;Financial stability;Econometric models;Financial instability; monetary policy; macroprudential measures; emerging
    Date: 2014–06–24
  20. By: George W. Evans (University of Oregon; University of St Andrews); Roger Guesnerie (Paris School of Economics, College de France); Bruce McGough (University of Oregon)
    Abstract: Within the standard RBC model, we examine issues of expectational coordination on the unique rational expectations equilibrium. Our study first provides a comprehensive assessment of the sensitivity of agents’ ?plans and decisions to their short-run and long-run expectations. We show this sensitivity is much too great to trigger eductive coordination in a world of hyper-rational agents, who are endowed with Common Knowledge and contemplate the possibility of small deviations from equilibrium: eductive stability never obtains. This impossibility theorem has a counterpart when adaptive learning is incorporated and real-time paths are required to satisfy a collective initial view of the future.
    Keywords: learning, expectational coordination, stability
    JEL: D84 D83 E32
    Date: 2014–03–24
  21. By: Curatola, Giuliano; Donadelli, Michael; Gioffré, Alessandro; Grüning, Patrick
    Abstract: This paper contributes to the ongoing debate on the relationship between austerity measures and economic growth. We propose a general equilibrium model where (i) agents have recursive preferences; (ii ) economic growth is endogenously driven by investments in R&D; (iii) the government is committed to a zero-deficit policy and finances public expenditures by means of a combination of labor taxes and R&D taxes. We find that austerity measures that rely on reducing resources available to the R&D sector depress economic growth both in the short- and long-run. High debt EU members are currently implementing austerity measures based on higher taxes and/or lower investments in the R&D sector. This casts some doubts on the real ability of these countries to grow over the next years. --
    Keywords: Austerity Measures,Fiscal Policy,Endogenous Growth,R&D
    JEL: G12 G15
    Date: 2014
  22. By: Juan Pablo Medina Guzman; Claudio Soto
    Abstract: In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the autorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.
    Keywords: Commodity prices;External shocks;Commodity price fluctuations;Monetary policy;Fiscal policy;Transparency;Economic models;Commodity prices, monetary policy, fiscal policy, imperfect credibility.
    Date: 2014–02–13
  23. By: Luo, Yulei; Young, Eric
    Abstract: In this paper we examine implications of model uncertainty due to robustness (RB) for consumption and saving and the market price of uncertainty under limited information-processing capacity (rational inattention or RI). We first solve the robust permanent income models with inattentive consumers and show that RI by itself creates an additional demand for robustness that leads to higher "induced uncertainty" facing consumers. Second, we explore how the induced uncertainty composed of (i) model uncertainty due to RB and (ii) state uncertainty due to RI, affects consumption-saving decisions and the market price of uncertainty. We find that induced uncertainty can better explain the observed market price of uncertainty -- low attention increases the effect of model mis-specification. We also show the observational equivalence between RB and risk-sensitivity (RS) in environment.
    Keywords: Robust Control and Filtering, Rational Inattention, Induced Uncertainty, Market Prices of Uncertainty.
    JEL: D8 D81 E21
    Date: 2014–07–05
  24. By: Bi, Sheng (Paris School of Economics); Langot, François (University of Le Mans)
    Abstract: We consider a labor market where the competitive search equilibrium is inefficient due to asymmetrical information. At the time when firms commit to specific hiring costs, workers hold private information on their intention of entering into retirement before the termination of the contract. When retirement is an event which occurs exogenously and information is complete, the long term employment relationship is preferred by the risk adverse workers. This implies that firms must implement a screening process when the information is asymmetric. We show that the optimal separating contract (an ascending wage profile) distorts the allocation of the workers who will retire later (the 'good' workers) in order to prevent the workers who will retire early (the 'bad' workers) from applying for these jobs. Secondly, we endogenize the retirement decision by considering two cases: an ex ante or ex post heterogeneity. In these two cases, we show that a separating equilibrium always exists, whereby good workers accept an ascending wage profile in order to make themselves differentiate from the 'bad' workers. These asymmetries in the information lead to an excess of retirement compared to the full information economy. Finally, in the case of ex post heterogeneity, we are able to show that the employment rate is unambiguously lower.
    Keywords: competitive search equilibrium, separating equilibrium, retirement
    JEL: D82 D86 J14 J26 J64
    Date: 2014–06
  25. By: Takashi Kamihigashi; Kevin Reffett; Masayuki Yao
    Abstract: In this note, we show that the least xed point of the Bellman op- erator in a certain set can be computed by value iteration whether or not the xed point is the value function. As an application, we show one of the main results of Kamihigashi (2014a) with a simpler proof.
    Keywords: Dynamic programming, Bellman equation, value function, xed point.
    JEL: C61
    Date: 2014–06–27
  26. By: Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: Motivated by the increasing use of forward guidance, we consider DSGE models in which the central bank holds the policy rate fixed for an extended period of time. Private agents' beliefs about how long the fixed-rate regime will last in uences current output and in ation. We estimate the structural parameters for US data and infer the expected duration of the zero lower bound regime. Our results suggest that the average expected duration is around 3 quarters and has varied significantly since the onset of the zero lower bound regime, with changes that can be related to the Federal Reserve's forward guidance.
    Keywords: forward guidance, dsge estimation, zero lower bound, unconventional monetary policy, shadow rate
    JEL: C32 E52 E58
    Date: 2014–06
  27. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Yonsei University); Kyooho Kwon (Korea Development Institute); Richard Rogerson (Princeton University)
    Date: 2014–07

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